Businesses might come to Donetsk Oblast because of the quality of the resources available to them, be it the black earth for agriculture or the highly qualified workforce available. Others come to take advantage of the opportunities afforded by the region's updating of its transport infrastructure and outdated technology. At the same time, the area’s mining and metals industries face global market pressures, meaning that they need to become safer and more efficient. Given this mix, Donetsk Oblast’s cities and steppe land hold substantial opportunities for foreign investors.
Moe Trond, chairman of risk assessment advisory company the Eastern Europe Group, believes the region's geographical diversity is as important as the range of sectors it can offer would-be investors. “In smaller cities, it is easier to establish good relations with the local authorities, and they in turn are often more sensitive to attending to the needs of their constituents. They are actively interested in seeing their communities’ employment and industrial bases grow,” he says.
Air separation project
One of the companies that plays a hugely influential role in both employment and industrial bases in Donetsk Oblast is System Capital Management (SCM), a conglomerate of more than 100 firms and Ukraine’s largest company, with more than $28bn in group assets. SCM’s companies, such as iron ore producer Metinvest, work with foreign firms in many capacities, including as a part of joint-venture projects and as a client.
One example is the 2011 contract with industrial gas firm Air Liquide. Under an industrial outsourcing agreement, the French company will be building and operating a new air separation unit in Yenakevo, 50 kilometres north east of the city of Donetsk, on the site of a steel plant owned by Metinvest. The state-of-the-art, €130m factory will produce 1700 tonnes of oxygen, nitrogen and argon a day, and will replace a Soviet-era unit.
Along with the technical innovation of the project, the contract itself is noteworthy. Jock Mendoza-Wilson, director of international and investor relations at SCM, says this is the first time this ‘over-the-fence’ model of sharing resources has been used in Ukraine’s steel industry. “Air Liquide and Metinvest will rely heavily on each other for this core industrial process. Both sides will be watching how it works, especially with an eye to further expansion.”
While Metinvest is contributing €26m to the project, the bulk of the financing comes in the form of a loan of €85m from the European Bank for Reconstruction and Development (EBRD) to Air Liquide. The EBRD’s presence was an important draw in credit-tight Ukraine. The difficulty of finding ready financing, especially at a municipal level, has driven public-private partnership (PPP) legislation in the country. The Agency for Investment and Development of Donetsk Region has taken the option of PPPs into account in the pre-packaged projects it offers. For instance, public works projects such as improving border stations are offered on a concessionary basis.
World-class port handling
SCM is also investing in the port of Mariupol. The company already has some experience in sea terminal operations through its port handling company PortInvest, but the impending privatisation of the Black Sea ports gives foreign companies an opportunity to partner with the conglomerate. Mr Mendoza-Wilson says: “SCM is a significant exporter of steel and iron ore, and exports some grain as well. It also imports coal. As such, SCM has a vested interest in ensuring world-class port handling [in Ukraine].”
SCM is not the only grain exporter in Donetsk Oblast, and with some 1.2 million hectares of arable land, agriculture is enormously significant to the region's economy. US food producer Cargill has had a presence in Donetsk since 2000 and has invested about $37m in its processed sunflower oil exporting operations. Donetsk Oblast is also an important location for adding value to raw products, according to both Mr Mendoza-Wilson and Mr Trond. Much of the region’s substantial population is situated close to its many growing and processing sites, providing producers with a readily available workforce and a consumer market.
SCM and Cargill, however, are not the only big players present in eastern Ukraine. A total of 17 foreign companies invested in new ventures in Donetsk between 2003 and 2011, according to greenfield investment monitor fDi Markets. In this time, these companies invested an average of $39.4m per project and created more than 1000 jobs.
Obtaining funding can be difficult in Ukraine, often making partnerships necessary. The substantial know-how of local residents is readily available, says Dušan Kulka, CEO of the Berman Group, a Czech economic development consultancy that has operations in Ukraine. “Using World Economic Forum methodology, Ukraine scores as high or higher than its neighbours in terms of education and innovation. The potential here is high.”
While Donetsk Oblast offers much to would-be investors, Mr Mendoza-Wilson recommends a measured approach to examining business opportunities. He says: “Investors would do well to draw up a structure that is clean, clear and considered for the business and its assets. Take the time to consider it, look for a partner, and decide how to come into the market. Due diligence will prevent many problems.”